Karat Packaging Q1 Earnings Call Highlights

Key Points

• Karat reported a “robust” Q1 with net sales of $116.9 million, up 12.9% year‑over‑year, accelerating to >20% growth in March and a rebound in online sales to $19.5 million; management says online revenue is on track for $100M+ this year.
• Gross margin fell to 35.5% from 39.3% as import costs and tariffs surged (import duties rose to $10.5M from $3.4M), prompting price increases of roughly 5%–15% and sourcing shifts; management expects tariff‑related savings to begin lowering COGS this month.
• Profitability and cash flow remained solid—operating income rose 8.2% to $8.5M, net income was $7.1M ($0.34/share), adjusted EBITDA was $12.5M, free cash flow was $6.3M, and the board approved another quarterly dividend of $0.45; Q2 sales are guided to grow ~8%–10% with full‑year sales expected in the low double‑digit range and adjusted EBITDA margin of 11%–13%.

Karat Packaging NASDAQ: KRT reported a “robust” start to fiscal 2026, with first-quarter sales up nearly 13% year over year amid improving demand, market share gains, and a return to growth in its higher-margin online channel, executives said on the company’s quarterly earnings call.

Management also addressed a dynamic cost environment that includes higher oil-related input costs and elevated tariff-related import expenses, while outlining pricing actions and sourcing shifts intended to support margins going forward.

Sales growth accelerated through the quarter

Chief Executive Officer Alan Yu said the company’s performance “accelerated significantly” as the quarter progressed, moving from “modest weather-impacted growth in January” to growth “exceeding 20% in March,” which included some pull-forward of orders. He said the acceleration reflected “improving demand, strong execution across the organization, and continued gain in the market share.”

Chief Financial Officer Jian Guo reported net sales of $116.9 million for the first quarter, up 12.9% from $103.6 million in the prior-year period. Guo attributed the increase primarily to $12.1 million from volume and mix and a $2.0 million favorable impact from pricing.

By channel, Guo said:

• Sales to channel accounts and distributors, the company’s largest channel, rose 15.1% year over year.
• Online sales increased nearly 10% year over year.
• Retail channel sales declined 12% compared with the prior-year quarter.

Yu highlighted the online business as a key contributor, saying online sales “returned to robust growth” after the company “pivoted to grow and fulfill our own online sales on our company storefront and third-party platforms.” Online sales rose to $19.5 million from $17.8 million a year earlier, he said.

Tariffs and import costs pressured gross margin

While management characterized gross margin as “resilient,” Guo detailed the impact of higher import costs in the quarter. Cost of goods sold increased 20% to $75.4 million, and Guo said the increase was driven by sales growth as well as higher import costs of $7.3 million.

Import duties and tariffs climbed to $10.5 million for the three months ended March 31, 2026, from $3.4 million in the comparable prior-year period, Guo said. Gross margin was 35.5% versus 39.3% a year ago, reflecting import costs that rose to 13.8% of net sales from 8.6% in the prior-year quarter, along with “elevated inventory adjustments” as a percentage of net sales. Guo said those pressures were partially offset by lower product costs as a percentage of net sales.

Yu said the company expects tariff-related savings under current trade policy to begin reducing cost of goods sold “this month,” which he said should “partially offset inflationary pressure” alongside pricing actions.

Price actions and oil-related cost inflation

Yu said the company is implementing price increases on select plastic items beginning “in the middle of this month,” citing the “sharp increase in oil prices and the resulting impact on product costs.”

In response to a question from Bank of America’s Kyle Benvenuto about oil price assumptions embedded in guidance, Yu said the company had been able to negotiate with vendors, with “majority of our partner vendors overseas” absorbing much of the increases. Yu added that resin prices in Asia had stabilized and “come down a little bit,” and he said the company did not see raw material prices rising further “from this point.”

Later, addressing how Karat’s pricing compares to competitors, Yu said the company’s price announcement was “5%–15%” depending on category, while peers “seem to have a price increase of 8%–12%.” Yu said Karat’s increase was on the lower end because the company views the environment as challenging for foodservice operators.

Yu also noted a tariff change that has aided the company’s pricing posture, stating that “in the past 6 or 9 months we were paying 20% tariff, now we're down to 10% tariff,” while cautioning there “may be changes in July and August.”

Operational leverage, cash flow, and dividends

Yu said operating cost leverage improved, with operating costs decreasing to 28.3% of net sales from 31.8% a year ago, reflecting a focus on operational efficiency and execution.

Guo reported operating expenses of $33.1 million, up slightly from $32.9 million. He attributed the increase mainly to higher rent expense tied to the opening of the company’s Chino distribution center in March 2025 and higher salaries and benefits, partially offset by a reduction in online platform fees and lower shipping and transportation costs due to lower online shipping rates.

Operating income increased 8.2% to $8.5 million, and net income rose 4.8% to $7.1 million, Guo said. Net income attributable to Karat increased to $6.7 million, or $0.34 per diluted share, from $6.4 million, or $0.32 per diluted share, in the prior-year quarter. Adjusted EBITDA increased to $12.5 million from $11.9 million, with adjusted EBITDA margin of 10.7% compared with 11.5% a year ago, according to Guo.

Guo said the company generated operating cash flow of $7.2 million and free cash flow of $6.3 million “despite continued heavy duty and tariff payments.” He added that as of March 31, 2026, Karat had $90.7 million in working capital and $36.4 million in financial liquidity, plus $5.7 million in short-term investments.

On shareholder returns, Guo said Karat paid a regular quarterly dividend of $0.45 per share on Feb. 27, 2026. He also said the board approved another $0.45 per share dividend on May 5, 2026, payable May 28, 2026, to shareholders of record as of May 21, 2026.

Guidance: 2Q growth expected to moderate after March pull-forward

For the second quarter, Guo said Karat expects net sales to increase approximately 8% to 10% from the prior-year quarter, with gross margin expected to be within 35% to 37% and adjusted EBITDA margin within 11% to 13%, “excluding potential tariff refund impact under the current trade policy.” For the full year, he said the company expects net sales growth in the “low double-digit range,” with gross margin of 34% to 36% and adjusted EBITDA margin of 11% to 13%, again excluding potential tariff refund impact.

Management attributed the implied deceleration in near-term growth partly to timing. Yu said April saw some softening because of pull-forward from March, but he described May trends as positive. When asked to quantify the pull-forward, Yu estimated “about $2 million were pulled forward from April to March.”

Yu also pointed to online growth as a major driver, telling Bank of America that April set an online sales record and that the company expects record online sales again in the second quarter. He said the company did about $72 million to $73 million in online revenue last year and is “on track for $100+ million” this year, adding that “a big chunk of the growth is from online sales revenue.”

On customer wins and pipeline, Yu said the company closed “another national chain account for paper bag” during the quarter and is working with “a very large chains,” with “a few large chains” that might convert this quarter or next. He also said the company is expanding SKUs with existing customers, including eco-friendly products and paper bags.

Yu added that Karat continues to reposition sourcing to manage tariffs and availability, including higher domestic purchasing and increased sourcing from Malaysia and Vietnam, alongside reduced purchases from Taiwan and China, as well as adding a new supplier in South America.

About Karat Packaging NASDAQ: KRT

Karat Packaging Technologies, Inc NASDAQ: KRT is a U.S.-based provider of premium packaging solutions for consumer goods and industrial products. The company specializes in the design, manufacture and delivery of high-quality litho-laminated folding cartons, tubes and flexible packaging. Karat Packaging operates an integrated production model that combines prepress, printing, converting and finishing capabilities to support the branding and shelf-appeal needs of its customers.

The company serves a diverse range of end markets, including food and beverage, confectionery, health and beauty, pharmaceuticals, specialty chemicals and promotional packaging.

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